Working for Families

Clause 188

Issue:   Main income equalisation account withdrawals

Submissions

(Matter raised by officials)

The remedial amendment to section MB 1(5D) should be clarified to ensure that when a Working for Families (WFF) recipient’s associated entities draw on funds deposited into their main income equalisation accounts it does not reduce the recipient’s WFF tax credit entitlement, but that withdrawal of interest earned on the accounts should continue to reduce the WFF tax credit entitlement.

Comment

Section MB 9 in the Income Tax Act 2007 ensures that when WFF recipients or their associated entities (listed in sections MB 4 and MB 7) deposit amounts into the main income equalisation accounts the deposits are added back for the purposes of the calculation of family scheme income.  This prevents a person or their associated entities from depositing income into main income equalisation accounts in order to artificially deflate the person’s family scheme income, and hence increase their WFF tax credit entitlement.

When a person or their entities withdraw the deposits and associated interest earned on those deposits, it is treated as taxable income.  Section MB 1(5D) is intended to ensure the WFF recipient’s WFF tax credits entitlement is not reduced a second time when they or their associated entities withdraw the deposits.  However, when a WFF recipient or their associated entities withdraw the interest that has accrued on deposits in their main income equalisation account, it should be included in family scheme income and reduce the WFF recipient’s WFF tax credits entitlement.

An amendment has been made to section MB 1(5D) in the bill that ensures when a person’s associated entities withdraw interest that has accrued on deposits in their main income equalisation account it reduces their WFF tax credits entitlement.  However, the current drafting of the part of section MB 1(5D) that ensures a WFF recipient’s WFF tax credits entitlement is not reduced a second time when their associated entities withdraw the deposits is still unclear and should be amended to be clear that withdrawal of a deposit by associated entities is not counted as family scheme income.

Recommendation

That the submission be accepted.

Issue:   Main income equalisation account associated entities attribution rules

Submission

(Matter raised by officials)

A further remedial amendment is proposed to clarify the part of section MB 9 that indicates when a WFF recipient’s associated entities make a deposit into or receive a refund from their main income equalisation account, the WFF recipient’s family scheme income (and therefore WFF tax credits entitlement) should only change by the proportion of the interest the WFF recipient has in the associated company and trusts.

Comment

It is intended that when a WFF recipient’s associated company makes a deposit into their main income equalisation account, the WFF recipient’s family scheme income should only increase by the percentage share the WFF recipient has in the associated company using the formula in section MB 4.  Similarly, a deposit made by a WFF recipient’s associated trust should reflect the number of settlors and the formula in section MB 7.  Likewise, when the WFF recipient’s associated entities draw on these deposits, the WFF recipient’s family scheme income should only decrease by the proportion attributable to the recipient by the associated company and trusts.  However, the wording in sections MB 9 and MB 1(5D) that aims to achieve this intent is unclear and it could be read as including the whole amount of the deposit made by the recipient’s entities, not just the proportion attributable to the WFF recipient.

Recommendation

That the submission be accepted, and apply from the beginning of the 2011–12 tax year.